The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Investing in emerging markets is generally considered to involve more risk than developed markets.
What is the cause of this slowdown and what is the government doing about it? There are several factors affecting the slowdown, including the previous tighter monetary policies of the Reserve Bank of India, several quarters of weakening consumer and business confidence, and the lack of significant structural reforms by the Modi administration. However, probably the most important factor has been the default to its creditors by the state-run Infrastructure Leasing & Financial Services (IL&FS) in September 2018, the largest infrastructure finance provider in the country.
Over the past few quarters, we have witnessed a rapid deceleration in consumption patterns and growth in India, but Indian policymakers have started to take action to tackle this slowdown.
Over the past twenty years, the company, which was considered ‘blue chip’, built debt to the equivalent of 18.7x its equity, with most of the debt used to directly finance large infrastructure projects in India. The company has put forward plans to reduce the number of projects it is involved in, putting 25 projects up for sale, and the government has appointed a new board to turn it around.
As a result, a number of these NBFCs have slowed down lending to the consumer sector, where they typically provide loans to finance cars, two-wheelers and other consumer durables, and this has been a key factor behind the slowdown. Within the banking sector, HDFC Bank continues to benefit from a high quality deposit franchise, double-digit loan growth within their retail customer base, and tight underwriting standards, which ensure that non-performing loans remain low. Indian policymakers have started to take action to tackle this slowdown, with the Reserve Bank of India cutting interest rates once again in September 2019 and announcing measures to channel more liquidity into the banking system. The government also announced a bold reduction in both the headline Corporate Tax rate and a lower tax rate for new manufacturing companies, with the aim of boosting the economy.